ON Semiconductor Corp (ON) — Q1 2019 Earnings Call Transcript

Thank you, Chris. Good morning and thank you for joining ON Semiconductor Corporation's first quarter 2019 quarterly results conference call. I'm joined today by Keith Jackson, our President and CEO; and Bernard Gutmann, our CFO. This call is being webcast on the Investor Relations section of our website, at www.onsemi.com. A replay of this broadcast, along with our earnings release for the first quarter of 2019, will be available on our website approximately one hour following this conference call, and the recorded broadcast will be available for approximately 30 days following this conference call. The script for today's call and additional information related to our end-markets, business segments, geographies, channels, and share count are also posted on our website. Our earnings release and this presentation includes certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measures under GAAP are in our earnings release, which is posted separately on our website in the Investor Relations section. During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. The words 'believe,' 'estimate,' 'project,' 'anticipate,' 'intend,' 'may,' 'expect,' 'will,' 'plan,' 'should,' or similar expressions are intended to identify forward-looking statements. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from projections. Important factors that can affect our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our Form 10-Ks, Form 10-Qs, and other filings with Securities and Exchange Commission. Additional factors are described in our earnings release for the first quarter of 2019. Our estimates may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions, or other factors, except as required by law. During the second quarter, we will attend the Bank of America Technology Conference in San Francisco on June 4th. Now, let me turn it over to Bernard Gutmann, who will provide an overview of first quarter 2019 results. Bernard?

Thank you, Parag, and thank you everyone for joining us today. Our first quarter results demonstrate our solid execution on the operations front in the face of slowing business conditions. Secular trends driving our business remain intact, and we are well positioned to capitalize on these secular trends to deliver strong revenue and margin performance. Mid to long-term outlook for our business remains strong, and our design win pipeline in our key strategic markets, which include automotive, industrial, and cloud power continues to grow. Despite near-term headwinds, we remain upbeat about our future. During the first quarter, we saw sub-seasonal trends across most geographies and end-markets, and these trends have continued into the second quarter. However, based on recent data, we expect to see improving business trends in the second half of 2019. Keith will provide further details on current business trends in his prepared remarks. We are managing our business prudently to adjust to this near-term slowdown. We have taken measures to control our operating expenses in line with relatively soft business conditions. We believe that a highly diversified customer base, exposure to the fastest growing semiconductor end-markets, and the long life cycle of many of our products should help us better navigate the current slowdown in demand compared to the broader analog and power semiconductor industry. While we are seeing some softness in business conditions in the near term, we are continuing to invest to strengthen and build our leadership in key strategic markets and to improve our cost structure. In the first quarter, we entered into a definitive agreement to acquire Quantenna Communications, which we believe will strengthen our presence in connectivity applications for industrial and automotive end-markets. We also recently announced our plans to add the first 300 millimeter fab to our manufacturing network in a phased transaction over the next four years. The addition of this fab in a staged process should accelerate our progress towards our 2022 target financial model, enable savings of approximately $1 billion in capital expenditure over the next several years, and provide sufficient capacity to support our long-term growth at a highly competitive cost structure. Now, let me provide you additional details on our first quarter 2019 results. Total revenue for the first quarter of 2019 was $1.387 billion, an increase of 1% as compared to revenue of $1.378 billion in the first quarter of 2018. First quarter 2019 revenue included the contribution of $18 million for ON Semiconductor Aizu, also known as OSA. Excluding the impact of OSA, our first quarter 2019 revenue declined by 1% year-over-year. As we announced earlier, OSA is our manufacturing joint venture for an 8-inch wafer fab in Aizu-Wakamatsu, Japan. GAAP net income for the first quarter was $0.27 per diluted share as compared to $0.31 in the first quarter of 2018. Non-GAAP net income for the first quarter was $0.43 per diluted share as compared to $0.40 in the first quarter of 2018. GAAP and non-GAAP gross margin for the first quarter was 37%. On a year-over-year basis, our first quarter 2019 GAAP and non-GAAP gross margin declined by 60 basis points, of which 50 basis points was due to the impact of OSA. Our GAAP operating margin for the first quarter of 2019 was 12.9%, as compared to 13.5% in the first quarter of 2018. Our non-GAAP operating margin for the first quarter of 2019 was 15.5% as compared to 15.7% in the first quarter of 2018. The year-over-year decline in operating margin was driven largely by the impact of OSA. GAAP operating expenses for the first quarter were $334 million, as compared to $332 million for the first quarter of 2018. Non-GAAP operating expenses for the first quarter were $299 million, as compared to $301 million in the first quarter of 2018. First quarter free cash flow was negative $19 million, and operating cash flow was $138 million. Capital expenditures during the first quarter were $157 million, which equates to a capital intensity of 11%. We expect capital intensity for 2019 to be approximately 9% of revenue. We exited the first quarter of 2019 with cash and cash equivalents of $940 million, as compared to $1.070 billion at the end of the fourth quarter 2018. We used $75 million of cash to repurchase 4.4 million shares of our stock in the first quarter. As a result of the acquisition activity in the first quarter, we have paused our share repurchase program. At the end of the first quarter, days of inventory on hand were 128 days, up by 8 days as compared to 120 days in the fourth quarter of 2018. Distribution inventory in terms of weeks increased quarter-over-quarter in the first quarter and is now slightly higher than our target range of 11 to 13 weeks. We expect to see a reduction in our distribution inventories in the second quarter. The increase in weeks of distribution inventory in the first quarter was driven largely by softer than expected demand. Now let me provide you an update on the performance of our business units, starting with Power Solutions Group, or PSG. Revenue for PSG for the first quarter was $704 million. Revenue for the Analog Solutions Group for the first quarter of 2019 was $494 million, and revenue for the Intelligent Sensing Group was $188 million. Now, I would like to turn the call over to Keith Jackson for additional comments on the business environment. Keith?

Thanks, Bernard. Our execution momentum remains strong, despite softer market conditions. We achieved solid margins and earnings performance, even with a slowdown in demand across many regions and markets. Our alignment with major trends in automotive, industrial, and cloud power sectors, along with effective management of operating expenses and strong execution, positions us well to handle the current market slowdown. Additionally, based on current order trends, distribution sales data, and macroeconomic indicators, we anticipate improvement in business conditions during the latter half of the year, and we are optimistic about our mid to long-term outlook. Our planned acquisitions of Quantenna Communications and GLOBALFOUNDRIES's 300-millimeter fab in East Fishkill, New York, reflect our commitment to strengthening market leadership and improving our cost structure. Key trends driving our business remain strong, and our customers increasingly view us as a critical partner for essential technologies that support significant disruptive changes in automotive, industrial, and cloud power markets. In automotive, the rapid adoption of electric vehicles and active safety features are expected to fuel growth in our power semiconductor and sensor divisions. In the industrial sector, we are seeing increasing demand for our power semiconductors due to higher energy efficiency standards. The cloud power segment is also experiencing robust growth, particularly for our power management products used in servers and 5G infrastructure. Regarding the overall business environment, conditions remain soft across most sectors and regions, but we are noticing indicators that suggest improving trends in the second half of the year. So far, orders for the upcoming half have demonstrated strong recovery, and there has been a significant uptick in distribution sales in recent weeks. Specifically, the situation in China, which has faced challenges in recent quarters, shows signs of improvement. While business conditions in other regions have been below seasonal averages, we believe this weakness is temporary and anticipate a rebound as customers align their inventory with demand forecasts. On the supply side, we are seeing a general reduction in inventory levels among OEMs, although their stock levels appear to be healthy. We think the inventory corrections among OEMs will largely conclude by the end of the second quarter. In terms of distribution, while there are reports of high semiconductor inventory levels, we believe our inventory is at healthy standards. As Bernard mentioned earlier, our inventory was slightly above our normal range at the end of the first quarter, but we plan to decrease these levels in the second quarter. Now, let's look at the performance across our various end-markets for the first quarter of 2019. Our automotive revenue in the first quarter was $465 million, accounting for 34% of our total revenue, and grew by 4% year-over-year. We have noticed significant weakness in the Chinese automotive market and some softness in demand from regions including the Americas, Europe, and Japan during the second quarter. However, we expect this softness to be temporary as global OEMs and tier-1 suppliers adjust inventories in response to the slowing automotive market. We anticipate demand for our automotive products will improve in the latter half of the year. Despite current challenges, our design-win pipeline in the automotive sector remains healthy, and our content related to automotive applications continues to expand, particularly in areas such as vehicle electrification, active safety systems, LED lighting, and other analog power management applications. We are seeing significant momentum for our power products, especially in vehicle electrification, and expect to see production ramp up for multiple electric vehicle platforms in 2020. Our Silicon Carbide products have received a positive reception from customers, and our power solutions are gaining traction in both 12-volt and 48-volt electrical systems. Additionally, our advancements in automotive radar technology are progressing, with the anticipation of initial revenue from this sector in 2021. In the analog power management space, we are advancing our programs for automotive processors and are actively collaborating with leading automotive processor manufacturers. There is ongoing demand for our LED drivers and lighting products. For the second quarter, we expect automotive revenue to dip slightly rather than follow the typical seasonal increase, mainly due to the sluggish global automotive market. The Industrial sector, covering military, aerospace, and medical applications, generated $359 million in revenue for the first quarter, representing 26% of our total revenue, with a year-over-year decline of 5%. The main source of weakness in the industrial sector is attributed to the Greater China region. Despite this, we are well-positioned to take advantage of the growing trend for increased power efficiency in industrial systems. We continue to see strong customer interest in our power semiconductor products and modules. Within Industrial, medical has been a robust area, particularly our solutions for implantable devices and personal diagnostics. For the second quarter, we expect a decline in industrial revenue compared to the first quarter, driven largely by softness in the Greater China market. The Communications sector, which includes networking and wireless, contributed $259 million in revenue, accounting for 19% of our total revenue and increasing by 15% year-over-year, primarily due to the 5G rollout. We expect this acceleration in our power products for 5G infrastructure to continue into 2019 as deployments in various regions gain momentum. Our power content in 5G systems significantly surpasses that in 4G systems, and our participation in 5G is also expected to be much higher. In the smartphone sector, we observed a decline in revenue quarter-over-quarter, although year-over-year growth was maintained. We predict a quarter-over-quarter increase in second quarter communications revenue driven by the growth in our 5G initiatives. The Computing sector posted $144 million in revenue for the first quarter, representing 10% of our overall income, with a year-over-year growth of 1%, mainly due to our strong server business. For 2019, we expect continued growth in our server segment, albeit at a slower pace compared to 2018. We anticipate significant increases in our content with future server platform generations. We project a quarter-over-quarter revenue increase in the second quarter for the computing sector, reflecting seasonal trends and ongoing strength in servers. The consumer sector attained $160 million in revenue for the first quarter, accounting for 12% of our total revenue, and experienced a year-over-year decline of 15% driven by weakness in consumer electronics and selective participation in certain markets. We forecast flat revenue in the second quarter for the consumer sector. In summary, business conditions remain below seasonal norms. Based on macroeconomic indicators worldwide, we do not foresee a prolonged downturn in our business and expect growth in the second half of the year. Despite the current industry weaknesses, the significant trends propelling our business remain robust, and we are positive about our medium to long-term outlook. We have established a leading position within distinctive power, analog, and sensor semiconductor solutions, and we believe customers increasingly depend on us as a crucial provider of enabling technologies for emerging and disruptive applications across automotive, industrial, and cloud power markets. In response to the slowing macroeconomic climate, we are carefully managing our operations with a strong emphasis on controlling costs. Our operational execution is solid. Now, I would like to hand it back to Bernard for forward-looking guidance.

Thank you, Keith. Based on product booking trends, backlog levels, and estimated turn levels, we anticipate that total ON Semiconductor revenue is expected to be in the range of $1.36 billion to $1.41 billion in the second quarter of 2019. Included in our second quarter revenue guidance is approximately $15 million revenue from the manufacturing services provided by OSA. For the second quarter of 2019, we expect gross margin to be in range of 36.5% to 37.5%. Our second quarter gross margin guidance includes the negative impact of approximately 40 basis points from manufacturing services provided by OSA. We expect total GAAP operating expenses of $322 million to $340 million. Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments, and other charges, which are expected to be $27 million to $31 million. We expect total non-GAAP operating expenses of $295 million to $309 million in the second quarter. We anticipate that the second quarter of 2019 GAAP net other income and expense, including interest expense, will be $31 million to $34 million, which includes non-cash interest expense of $9 million to $10 million. We anticipate our non-GAAP net other income and expense, including interest expense, will be $22 million to $24 million. Cash paid for income tax in the second quarter of 2019 is expected to be $12 million to $16 million. We expect total capital expenditure of $140 million to $150 million in the second quarter of 2019. We expect capital intensity to subside in the second half of the year, and for 2019, we expect capital intensity of 9%. We also expect share-based compensation of $26 million to $28 million in the second quarter of 2019, of which approximately $2 million is expected to be in the cost of goods sold, and the remaining amount is expected to be in operating expenses. This expense is included in our non-GAAP financial measures. Our diluted share count for the second quarter of 2019 is expected to be 414 million shares, based on the current stock price. Further details on share count and earnings per share calculations are provided regularly in our quarterly and annual reports on Form 10-Q and Form 10-K. With that, I would like to start the Q&A session. Thank you and please open up the line for questions.

Hey, thanks guys. So this is still a little on the weak side. Would you say business has gotten, I guess, any worse than it was three months ago or is it basically stayed at the same level?

No, it's actually improving here in the month of April, noticeably better than it was in the first quarter. And so definitely improving trend.

Okay. Thanks, Keith. And then as my follow-up, any commentary on lead times, anything changing there?

I think lead times will be stable for a while. Our power lead times remain extended, but everything else is in normal range.

Thanks, guys. Keith, I wanted to ask about the cycle side of the equation. If I just compared your transcript of your prepared comments from the last quarterly call to this quarterly call, both of them express confidence about near-term bookings getting better, but yet the second quarter guidance is still weak. I know you just said April got better, but could you give us a little more color on why you’re confident in the second half of the year? And maybe specifically on the automotive and industrial side, given the importance of those especially given that those were weaker and especially industrial, I guess, in the quarter and the guidance expected to go down again. Yes, we point to several things. One, resales and distribution have picked up significantly in April. So that is a much different trend than we had going on in Q1. From the automotive side, specifically the inventory correction is going on in our direct customers. We can tell that because their orders for Q1 and into Q2 were much less than the automotive resales. So we are seeing orders now being placed by that direct channel out into Q3 and picking up nicely. So overall we are seeing a big pickup in bookings for the second half and more current activity in our distribution channel. Great. And then for my follow-up one for you, Bernard, on the OpEx side. You guys did a great job in the quarter coming in low and you’re holding it flat in the second quarter. Is that just cyclical belt tightening, which would be understandable given where revenues are? Is there something more structural about that and any sort of color on your full-year outlook of how you’re going to handle OpEx?

We have definitely been prudent in our deployment of OpEx and have taken some belt tightening in cost reduction items. We also modulate our variable comp based on business results, so there is also some impact of that. So for the year, we expect it to still be prudent in terms of our approach towards that. So I expect a good set of numbers.

Thanks for taking my question. Actually, I had two as well. Keith, you mentioned you were starting to see some distributor resale activity pick up. Can you help us quantify what that rate of growth or decline was in Q1? What are you seeing now and importantly where do you see distribution inventory exiting Q2?

So going into Q1 or the Q1 data set, the resales and our sell-in distribution were approximately the same. And as we’ve entered April, there's a significant increase in the resales above our ship-ins in the double-digit percentage range.

Got it. And as my follow-up, maybe Bernard one for you on cash generation. Q1 was somewhat lower, I imagine because of seasonal and macro trends, but how are you thinking about the recovery from here and any comments on how we should think about the full-year free cash flow outlook? Thank you.

The first quarter is typically weaker due to seasonal factors and events like our payment and annual bonus plan taking place then. The second half of the year is usually our stronger period. Therefore, we do not anticipate any significant changes to our previous discussions regarding free cash flow generation. Additionally, we are maintaining good control over our operating expenses, which will also contribute positively to our free cash flow generation.

Yes, hi. Just on the disti inventory comment that you made, I know you said inventories were picked up a little bit. How much of that is because of the industrial weakness that you’re seeing in Greater China? And how do you see that progress through the June quarter? Thanks.

Yes, so our inventories did not grow in dollars, they just grew in days as you calculate with the resales. And yes, certainly in Q1, the China industrial portion was a contributor.

And I know on the compute side your March quarter was up 1% year-on-year. Can you talk about some of the trends you’re seeing there into the back half between content share gains or units picking up? Thanks.

Yes, we do expect to see more units as we go forward in the server side of the business this year. The rest of it is apparently very stable.

Yes. Good morning. Thanks very much for taking the questions. I have two as well. One of your competitors, Infineon, reported about a month ago, and at the time they said they expected September quarter revenue to grow, but to be below seasonal. And I guess you have a good month of bookings in April, but I mean as you guys look today, are you expecting more seasonal type trends in the second half of the year or just any directional color on 2H, I think will be helpful.

We only provide guidance one quarter at a time. It feels a bit early to project for the September quarter right now, but we are certainly encouraged by the data we've seen this month.

Okay. That’s helpful. And Keith, in your prepared remarks you talked about silicon carbide, seeing good momentum there. Can you just comment a bit more on the breadth of customer engagements and wins and how that may translate into revenue over what sort of the timeframe? Thank you.

Yes, we have a broad range of wins in the industrial market, in the automotive market. Geographically that is spread out fairly wide, Europe, North America, and Asia with our strongest automotive wins in Asia.

Yes, thanks for taking the question. My first question is regarding the gross margin outlook. It's flat guys, but segment mix seems like it's actually a bit adverse with auto and industrial down. So it seems like there may be some good things happening either on an intra-segment basis or company-specific activity. What's going on there and how should we think about gross margin potential in the back half of the year?

The fundamentals we discussed at our Analyst Day remain unchanged, and the same factors contributing to incremental revenue, manufacturing cost savings, and some divestitures will drive improvement over time. In the short term, we are facing a slight negative mix impact as growth is coming from our lower-margin end markets. However, we have implemented effective cost control measures that will help stabilize the gross margin.

Thanks for that. And then, Keith, following up on the base station comments and acceleration getting on the infrastructure side, can you just speak to the breadth of customer activity there? And as you look out through the year, what happens with the progression of that business as we go through 2019? Thank you.

Yes, we have strong wins across all of the players in the telecom infrastructure area and we're expecting that to almost double this year from our content from last year. So very, very significant trends and again, it's broad-based and across all customers. Relative to the rest of the year, it's kind of contained in my comment on the growth, we are expecting to see it continue to accelerate.

Yes, morning. I guess in the context of ON didn't see a lot of pricing tailwinds when the market got tight last year. I’ve seen some stuff of some of your competitors maybe on MOSFETs and discretes beginning to lower pricing. Are you seeing that out there as well and does that affect any way the gross margin expectations in the second half of the year as pricing begins to normalize in some of those products?

We’re not seeing any pricing declines at all. In fact, it's less than normal right now.

Okay. And then as a follow-up, the smartphone market, obviously, nice to see it up in the first quarter given the volume challenges. How do you expect kind of maybe smartphone volumes as you move throughout the year? Is this going to be a down market that maybe ON can grow because of content or will you more closely follow kind of the volumes of the market as the year progresses?

We certainly have continued content increases and as you know that market is very much back end loaded. So we are expecting to see an increase from the first half, but overall total smartphone units we're expecting to be very flattish year-on-year.

Hey, guys. Thanks for the question. So, Keith, I know you guys got one quarter at a time, but last quarter you guys guided for growth year-on-year top line in 2019. And then, I think you guys also talked about gross margin expansion. I was wondering if you guys had any updates for 2019 relative to that?

Yes. We are still only doing one quarter at a time. Clearly, the growth of the markets in 2019 is going to be very muted. And so we're not expecting a significant growth in the market this year, but we believe we will be above the industry and our peers.

Can you provide a rough estimate of the percentage or dollar amount contributing to revenue from 5G at this point, and what the contribution was for the quarter?

I don't have that number right now, sorry Chris.

Thank you very much. Good morning. Just a quick one on the data center power business. I just wondered how you guys might have factored into your commentary this morning in the data center space. The pretty sharply revised outlook from Intel last Thursday night and sort of what the design and lead times might be if you have data center power portfolio of products designed into two products that might feature other silicon, whether that’s Nvidia, AMD, Xilinx, any of the other folks that are ramping in that space? Any color there would be helpful. Thank you.

Yes, we do have a broad range of power solutions and we are expecting some growth there from a content perspective in total for the year. So, again, I think it goes beyond just the data center comment you hear from the processor guys, we’ve content gains and we are spread across all of the suppliers.

Hello. I’m taking the question for Rajiv Gill. First off, I want to say congratulations on your acquisition of the Fishkill fab and just like moving forward what is your strategic vision when it comes to expanding capacity in 300 millimeter, like any further plans there? How should we think about this expansion? Thank you.

That expansion we are very excited about. It should fuel our growth for many years. We talked about the opportunity of doing well in north of $2 billion of revenue there. So we think that covers us, and that's why we believe we will be able to save CapEx going forward.

Okay. And just a quick follow-up. In terms of China, have you seen any changes in the past few months? Some of your competitors have said there have been some signs of stabilization, like any update, any color on that? Thank you.

Yes, the booking trends from China definitely picked up at the end of the first quarter and we are seeing that continue here in the second quarter. So we're encouraged that it may be their inventory correction period is past them.

Good morning. Thank you for taking my question. My first question is regarding the consumer sector, particularly white goods, which has been weak since the third quarter of last year. This was actually one of the first areas where we noticed the weakness emerging. It appears to be stabilizing quarter-over-quarter this quarter. Are you seeing any improvement in order and forecast trends as you approach the second half of the year?

It is and it is really in China. Seasonally we do normally see a pickup at this time. And so I would say that market is returning to more normalcy.

Thanks for the insights there. And then obviously industrial continues to be impacted by the weakness in Greater China. What have you seen in the other geographies, I’m curious there. And are you seeing the same sort of booking indicators, sell-through trends that also point to a more normalized second half for the industrial sector?

Actually, we’ve seen what looks to be like a little inventory correction still going on there outside of China. And so our sub-seasonal comments in the prepared remarks apply to the global area.

Thanks for taking my question. I wonder if you could give us a little more detail on what your CapEx spending has been on?

Our CapEx spending, which was 11% in the first quarter, but we’ve said in the prepared remarks the full-year will be 9%, is mostly for capacity. I would say, it's skewed a little bit more towards the front end capacity this year, but fairly evenly split.

Okay. Your expansion for internal wafer manufacturing, is that completed now?

It is ramping right now and it is from the CapEx spend, mostly completed.

Okay. Thank you.

Yes, good morning, everyone. Thank you for the opportunity to ask a question. I am curious about the comment regarding half-on-half growth in the second half. Does that refer to half-on-half year-over-year? Also, in response to the earlier question, you mentioned that you expect to outpace an industry that is anticipated to show slight growth. However, some believe the semiconductor industry might actually decline this year. Are you confident in achieving full-year growth, or is it still too early to determine?

Yes. So it's too early to tell, John. My comment is, I think we will outgrow the industry and I actually didn’t give you an industry number. So we're confident about the numbers we're seeing from the design wins and feedback from our customers that we're going to have continued share gain this year. But it's too early for me to call a full-year.

That's helpful. As a follow-up, considering that it's typically a seasonally slow quarter for free cash flow and the buyback has been suspended, could you clarify how you plan to use cash moving forward and when you anticipate being ready to resume buying stock?

Well, we are committed to our $1.5 billion buyback program and as we said, we did $75 million in the first quarter. So that commitment will continue. We will discuss with our Board at the upcoming Board meeting the re-initiation date. But in general, we are committed to continuing with that plan.

Hi. Good morning. Thank you. Keith, I was just trying to reconcile your comment about OEMs and your confidence about the second half. And maybe I’m missing something, but if OEM inventory is at healthy levels, why are they reducing inventory and does that not mean that they’re seeing a slower demand environment for the back half? And then how do you reconcile that with your confidence for the second half? That is my first. And then I had a quick follow-up.

Yes, I think on that we’ve looked at past trends, and particularly the automotive and industrial segments when you do go through a softer market, they overcorrect. And again we compare the sellout rates from our customers and look at their selling rates to get that. Certainly, there could be some anticipation of softer numbers, but the dialogue that we’ve had with them does not indicate that. It does indicate they're trying to work on their cash flows and make sure that they continue to perform on a cash basis.

Okay. For my follow-up on capacity, I'm concerned about the addition of capacity. I've heard similar worries from investors regarding your measured approach to capacity expansion, especially since competitors are also increasing theirs. Can you provide insights into the overall industry capacity for discrete? What is the outlook, considering you've experienced tight conditions for a while? There is concern that excess capacity could emerge, which might persist.

We certainly are careful and watch that. But we look at the growth rates that we’ve talked about with electric vehicles with the industrial and with the power segment out there for solar and wind etcetera. The capacity that we see coming online over the next few years still looks to me to be a little less than the industry demands. We’ve commented that with all the activity you heard about we continue to have extended lead times in power. So we're actually feeling that we're in pretty good shape.

Hi. Good morning. On the manufacturing side, how does the time it takes for you guys to get equipment these days compared with the equipment lead times exiting last year?

In some spots it's coming a little. Most of the equipment was at a year kind of run rate and some of it's now down in the 9 or 10 month range, but it's nothing dramatic yet.

Okay, great. And then could you provide color on your utilization rates for the just reported quarter and your expectation for the June quarter?

So it was down in the first quarter in the middle, and we expect that to be about the same in the second quarter.

Yes, thanks for taking the follow-up question. Typically when I ask about revenues, I focus on the end markets, but Intelligent Sensing did grow quarter-on-quarter at a business unit level. Guys, what’s going on in Intelligent Sensing that’s enabling it to overcome the cyclical pressures that we’re seeing out there?

Yes, that continues to be the automotive portion of the business. As you know, we were curtailing the consumer piece due to margin contribution and the automotive piece continues to grow for us. And so that's been a great growth story, but it's all automotive.

Thanks, Keith. And then the second question is related to the Quantenna acquisition. It's early days, but I imagine your salespeople have been able to gather some feedback from customers on their reaction to the deal. Can you share what you’ve heard thus far with this?

Yes, it's been well-received. Customers are looking forward to having a large supplier with the great technologies that Quantenna has, so it's been very well received so far.

Yes. Hi, guys. Two questions. First, Keith, if I can ask you for modeling purposes, auto and industrial are both down, but if I had to ask you to sort of venture as to which one would be down more on a percentage basis? And then I had a follow-up.

We think automotive will be slightly down to flat, so there's not much change there. Automotive might be down a little more.

Industrial.

Yes, industrial.

Okay. Industrial, flattish. Got it. And then, so you’re expecting to see reduced inventory in the disti channel. Is that a function of just demand picking up or are you still at this point today actively reducing your selling into the channel?

So the answer is we’re seeing resales pick up noticeably and we expect our shipments in to be flat to down.

Yes, hi. I have a question regarding the seasonality you anticipate for the second half of the year, considering the different business mix. What are your thoughts on this right now?

So I’m not sure the exact question there, but we see all of our businesses picking up in Q3. So generally that is a trend for us across the board.

So I would say for our general company seasonality with the mix of products we have right now for Q3 is probably in the 4% to 5% and flat for the fourth quarter.

Thank you for that information. Regarding the GLOBALFOUNDRIES deal, could you provide some insights on the timing and scale of the cost and margin benefits you anticipate? I understand this is a somewhat unique structure, so could you specify when you expect to start seeing benefits from it?

We will expect to start seeing benefits from that in the middle of next year as we start shipping volumes of products out of there, and then it will grow and increase as we increase the total amount we run in that factory for the next three years.

Yes, just wanted to get back to the commentary about inventory and distribution, and the targeted 11 to 13 weeks. So just for Q2 kind of where you expect it to shake out and then how you’re thinking about managing that into the second half of the year?

We would be expecting it to get back to the normal range in the second quarter. And then we will continue to prudently manage that into the second half. So normally we do see it drop a bit in Q3 as demand picks up and then slightly up in Q4.

Thank you everyone for joining the call today. We look forward to seeing you at various conferences during the quarter. Thank you and goodbye.